Global Auto Giants Team Up with China's Tech Providers for a Share in the World's Largest Car Market.

The Beijing Auto Show 2024 concluded last week. It showcased state-of-the-art EVs from various Chinese companies. China is the largest producer and market for EVs.

China is the single largest market for Volkswagen and Mercedes; it is the second largest market for Toyota and Tesla.

Automobile giants such as BMW, Mercedes, Toyota, Tesla, and Volkswagen face an existential crisis if their China sales drop. They are investing significantly in local manufacturing and technology partnerships with Chinese companies.

Elon Musk flew to meet the Chinese Premier after losing market share in China, seeking permission to launch Tesla’s Full Self-Driving feature.

US-China trade war, deteriorating political relations between the EU - China, and territorial disputes between Japan and China loom in the background.

What will be the long-term implications of the actions of these European, Japanese, and US companies?

Will this be a desperate Faustian deal with Mephistopheles?

techcrisp.org investigates

Background

The worldwide passenger car market was about US$1.9 trillion in 2023, with 78 million units, including 14 million EV sales (18%).

According to our estimates, passenger car sales will remain lukewarm globally in 2024. This is due to the economic slowdown in China and challenging economic conditions in Europe and the USA. However, the International Energy Agency (IEA) predicts that around 17 million electric vehicles (EVs) will be sold in 2024, constituting 20% of the total passenger car sales. Looking ahead to 2030, we estimate that the total sales of passenger cars will reach 140 million units, with 49 million EVs sold (35%). The IEA expects EVs to account for 50% of total car sales by 2035. China presently produces 50% of EVs worldwide and 80% of EV batteries.

While China has been a booming market for EVs, the USA and European markets were sluggish due to a lack of charging infrastructure, local manufacturers' push for ICE (Internal Combustion Engine) cars, including range anxiety.

Key factors driving EV growth in China include enhanced competition among manufacturers, decreasing battery and vehicle prices, and supportive policies. EV market share is projected to reach up to 45% in China, 25% in Europe, and over 11% in the United States in 2024.

China enjoys a vibrant manufacturing supply chain for EVs, with more than a dozen companies offering EVs. The Chinese ecosystem has also spawned a large number of technology companies in AI, ADAS, and Mobility solutions. Consequently, costs are lower, making immense sense to manufacture in China.

China has implemented extensive government subsidies, tax breaks, and other incentives to promote the development and adoption of electric vehicles (EVs). The government has also provided reliable procurement contracts to domestic EV companies in the early years, thus helping them establish a revenue stream. Local governments have worked closely with EV companies to customize policies that support their growth, such as BYD's partnership with Shenzhen. Most importantly, Chinese companies have invested heavily in research and development (R&D) to drive innovation in the EV industry.

Present Status of Foreign EV Manufacturers in China

Volkswagen Group

China is Volkswagen Group's largest single market for ICE and EV cars. Volkswagen’s strategy is “In China for China,” for which they have established the Volkswagen China Technology Company. Volkswagen has also formed a JV with Chinese government-owned SAIC to produce ICE and EV cars.

Volkswagen announced a technology tie-up with DJI Automotive, spun out of DJI, the largest drone company in the world, to develop an Assisted Autonomous Driving System. The partnership aims to create a driver-assist system for the newly launched Tiguan L Pro. The Advanced Driver Assistance System (ADAS) sourced from DJI is said to be affordable, costing around US$900. Volkswagen believes this solution will enable budget cars priced at roughly $20,000 to function autonomously.

Volkswagen also announced a JV with Horizon Robotics called Carizon, which aims to develop another Advanced Driver Assistance Systems (ADAS) and Autonomous Driving (AD) solution for the Chinese market. Volkswagen will invest approximately €2.4 billion in cooperation with Horizon Robotic. CARIAD ( A Volkswagen company) will hold a majority stake of 60% in the joint venture. The partnership aims to accelerate the development of automated driving solutions and enhance the integration of numerous functions on one chip. Volkswagen will actively develop chip technology and share its know-how with the Volkswagen Group.

Volkswagen announced another deal with Xpeng, a high-tech EV company. Volkswagen has agreed to invest approximately $700 million in Xpeng, taking an ownership stake in the Chinese EV maker. The companies will jointly develop and manufacture two new mid-sized EVs based on Xpeng's G9 platform. These new VW-branded EVs are planned for launch in the Chinese market in 2026. Xpeng's advanced driver-assistance software and technologies will be integrated into these new VW-branded EVs developed through the partnership.

In a separate agreement, Volkswagen's Audi brand will also work more closely with its existing Chinese partner, SAIC Motor, to develop new Audi-branded EVs for the Chinese market.

Another deal between Volkswagen and ThunderSoft of China involves a joint venture called CARThunder, which aims to accelerate the development of connectivity and infotainment systems in China. CARIAD will hold a 49% stake, and ThunderSoft a 51% stake. The partnership focuses on developing and testing software products and solutions in connectivity and infotainment, including software development services for operating systems, human-machine interfaces, cockpits, and cloud development.

CARIAD is a software company that operates under the Volkswagen Group umbrella. Its primary focus is on developing advanced software solutions for vehicles, including connectivity, infotainment systems, and automated driving technologies. CARIAD plays a crucial role in Volkswagen's digital transformation and innovation efforts.

Volkswagen shall also export EVs developed in China to the rest of the world.

BMW

BMW demonstrated a concept EV car, the Neue Klasse, which will be manufactured in China by 2026 for the local market and exports. This concept car represents BMW's vision for the next generation of bespoke electric vehicles. The production of the BMW Vision Neue Klasse in China is part of BMW's strategy to expand its electric vehicle offerings and production capabilities in the Chinese market.

BMW plans to produce the Neue Klasse at its Shenyang production facility. BMW revealed a significant $2.76 billion investment to update and expand the Shenyang factory to boost its electric vehicle (EV) production capabilities in the world's largest EV market. The investment will bring BMW's total investment in the Shenyang facility to US$15 billion.

Mercedes Benz

China is Mercedes's largest market, accounting for 33% of total units sold. Mercedes has a manufacturing presence in China.

BYD and Mercedes-Benz have partnered to create the DENZA Z9 GT model, which was recently showcased at the Beijing Auto Show. This luxury electric vehicle is designed to compete with high-end European brands like Porsche and Ferrari. The collaboration highlights their joint efforts to develop a premium electric vehicle for the luxury EV market.

Mercedes has partnered with Tencent and Electronic Art Inc. to integrate the “Need for Speed” game. The partnership signifies a commitment to creating innovative and personalized in-car entertainment experiences for drivers and passengers alike.

Mercedes is testing its Autonomous Driving System in Beijing.

On the other hand, the EU is investigating the subsidy provided to Chinese EV manufacturers by their government, and experts estimate that the EU may have to impose tariffs as high as 50% to protect local manufacturers. Presently, the EU has a 10 % tariff on Chinese EVs.

Toyota and Nissan

North America is Toyota’s largest market, accounting for 25% of revenue, followed by China, which accounts for 20%.

Toyota has partnered with WeChat of Tencent to deploy AI and cloud-based software in its cars. The partnership was formed as part of Toyota's efforts to boost its Artificial Intelligence (AI) capabilities in the Chinese market.

Two locally developed EVs named bZ4X and bZ3 shall be launched in 2024. New models are under development.

Toyota will also sell its plug-in Hybrid, hydrogen-ICE, and hydrogen fuel cell cars in China. A fuel cell plant in collaboration with SinoHytec will go live in 2024.

Toyota has tied up with various Chinese OEMs such as Guangzhou Automobile Group, China FAW Group, Foton Motor, Dongfeng Motor, and SinoHytec to source low-cost inputs.

Nissan Motor announced a partnership with Baidu Inc., another Chinese tech giant, with the same goal.

These cross-border collaborations between Japanese automakers and Chinese tech companies highlight the growing importance of AI in the automotive industry for ADAS.

Hyundai

Hyundai announced a new partnership with CATL, jeopardizing its longstanding partnership with SK On, a Korea-based battery company. The agreement between CATL and Hyundai includes licensing CTP (Cell to Pack) technology, which will be used in Hyundai's electric vehicles.

Tesla

Tesla started producing EVs in Shanghai in 2019. At that time, there were few local EV companies in China. Tesla triggered a “Catfish Effect” among prospective EV companies.

China was once Tesla's biggest market; last year, BYD surpassed it by selling more EVs in China and exporting them as well. In response, Tesla had to reduce its prices. A week ago, Tesla's CEO, Elon Musk, met with the Chinese Premier, Li Qiang, and signed a deal with Baidu. Baidu will now provide Tesla with its high-definition mapping and navigation system. China has strict data security standards for maps controlled by a few local companies.

Although Tesla has been using Baidu's maps since 2020, this deal was necessary to clear a regulatory hurdle for introducing Tesla’s Autonomous Driving System, FSD, in China. Tesla must undergo trials and approvals before its FSD is approved for commercial use.

Tesla charges US$8,000 or a US$99 monthly subscription for its FSD in the US market. With 1.6 million Teslas on Chinese roads, its FSD software has a total accessible market size of US$12 billion. Of course, not all of it will materialize into revenues. Tesla will have to compete with many Chinese EV manufacturers offering free Level 3 Autonomous Driving software with Chinese voice commands. Tesla’s FSD is Level 2.

Ford

Ford announced that it has licensed technology from CATL to set up a battery plant in the US. The deal involves a partnership in which CATL's Lithium Iron Phosphate (LFP) battery technology is licensed in a new $3.5 billion electric-vehicle battery plant that Ford will operate and control in southwest Michigan.

Chinese EV Companies

China has incubated a significant number of local EV manufacturers such as BYD (Build Your Dreams), SAIC Motor Corporation Limited, Geely, NIO, Xpeng, Li Auto, FAW, JAC Motors, BAIC Motor, ARCFOX, Skyworth Auto, NETA (Hozon Auto), Airways, Leapmotor, Great Wall, Zhidou.

BYD became the largest producer of EVs in the World in 2023. BYD is setting up plants in Asia, including one in Hungary. It plans to open a manufacturing facility in Mexico to cater to the US market and avoid present US tariffs of 25%.

Chinese tech giant Huawei and the automotive manufacturer Seres. have launched AITO EV models that feature Huawei's expertise in software design and the HarmonyOS ecosystem while Seres handles production. The brand currently operates exclusively within the Chinese market.

An important entrant has been Xiaomi, the smartphone company that has launched a futuristic high-end model with ADAS and a Smart Cockpit.

Chinese EV manufacturers offer a range of low-cost to premium feature-rich cars, including Autonomous Driving Software, e-mobility, and car connectivity solutions.

Conclusion

China has become the largest technology and manufacturing EV hub in the world. This ecosystem will become the fountainhead for innovation and provide economies of scale.

Companies like BYD take 18 months from conception to launch of an EV, compared to Mercedes, which takes 4-5 years. Tesla has not launched a new car in the past four years; even the Roadster, announced in 2017, has yet to be launched.

EVs with ADAS software shall require high-end silicon AI chips. Huawei and Xpeng, an EV manufacturer, are developing AI chips for the automotive sector in the face of US sanctions.

Chinese companies have demonstrated their capabilities in high-technology automobile design, software solutions, and AI chips. They are more competitive in terms of pricing.

The Chinese government may continue subsidizing local EV companies, especially for exports.

The West and Japan have previously lost to China in various segments like electronics. EVs are the future of automobiles and the futuristic “ Car as a Connected Living Eco-System.”

Tensions between the US, EU, Japan, and China shall be a significant risk; high financial stakes of automobile majors will give the Chinese more political bargaining power.

Western and Japanese automakers and Chinese companies will export EVs from China, affecting local EV companies. The US and EU may impose higher tariffs.

Quite strangely, the Chinese people and government still talk vehemently about “ The Century of Humiliation,” the period from 1839 to 1949, when they experienced the opium wars, a series of military defeats, and unequal treaties imposed by Western powers and Japan.

This reflects the Chinese perspective on this period, emphasizing the sense of national shame and anger at the perceived injustices inflicted upon the country. With its enormous economic and technological growth in recent decades, the country is demanding a new position of power on the world stage.

Tesla, VW, Mercedes, and Toyota face an existential risk if they lose market share in China. History has shown that deals done in desperation, without a position of strength, especially where one party has nothing to lose, may not always have a happy ending.